Saturday, January 14, 2012

Heritage Economic Freedom Index

I would like a place I could call my own
Have a conversation on the telephone
Wake up every day that would be a start
I would not complain of my wounded heart
--New Order

For years the Heritage Foundation has published its Index of Economic Freedom. The Index is meant to capture levels and trends in economic liberty on a country by country basis.

The index of economic freedom is determined by assessing ten components of economic freedom spread across four categories:

Rule of law (property rights, freedom from corruption)
Limited government (fiscal freedom, government spending)
Regulatory efficiency (business freedom, labor freedom, monetary freedom)
Open markets (trade freedom, investment freedom, financial freedom)

For each component, quantitative and qualitative data are used as the basis for a 0 to 100 score. The ten component scores are weighted equally and averaged to get a country's overall economic freedom index.

The just issued 2012 index finds the US sinking lower. The 2012 value of 76.3 marks the third consecutive year that the US economic freedom index has come in below the 80 benchmark deemed to reflect a 'free' condition. The US also slipped from 9th to 10th in the overall economic freedom rankings.

There is much to question about the Heritage assessment methodology. The grading scales have an element of subjectivity as are the data sources chosen as information sources. The resulting measures, therefore, may lack validity. For instance, the scores for business, labor, and monetary freedom seem way too high at first glance. The various components are not independent either. For example, monetary policy is likely to spill into a variety of areas such as limited government, regulation, and open markets.

However, my biggest problem is the equal weightings policy. It is unlikely that each of the ten components contributes equally to the economic freedom construct. Some almost surely matter more than others.

My sense is that the Heritage approach may overstate the true level of economic freedom in the US and understate the true degree of decline.

That said, the Heritage index is one of the best known indexes out there and the general trends are certainly consistent with what is going on.

US economic freedom is in decline.

1 comment:

dgeorge12358 said...

Freedom prospers when religion is vibrant and the rule of law under God is acknowledged.
~Ronald Reagan